Kevin O'Toole/LONDON

Japan's banks are predicting an extended reduction in their aircraft financing activity in the wake of the country's banking crisis and the demise of their favoured funding vehicle, the Japanese leveraged lease.

Japanese banks have historically accounted for as much as 20-25% of the world's airliner financing market, but that business has now been virtually frozen because of the critical state of the country's whole banking sector.

Japan's Government is drawing up plans to avoid further collapses, although the full extent of the problem is only likely to emerge at the end of March, when banks reveal their financial results. The key measure will be the state of capital ratios, which put limits on the level of a bank's lending as a multiple of assets. A depressed domestic economy, with falling share and land prices, has cut asset values, while a 15-20% fall in the value of Japanese yen has increased the value of US dollar loans.

"The Japanese banks are not going to be there as they were even six months ago, but we hope that they're not going to disappear completely," says Ian Hosier, who heads structured finance in London for Sanwa Bank, one of the stronger players.

"Even if they meet their ratios, they are not going to rush out and look for new aerospace business," he says, adding that Japan's lending is now frozen and that its share of world aviation finance this year is likely to be in "single digits".

At the same time, the Japanese Government has announced the end of the leveraged lease, which encouraged aviation business through its tax advantages. The lease, which was the mainstay of the country's aircraft financing, will be in place for domestic deals, but will come to an end internationally by the start of October.

Financiers expect the gap to be replaced by debt-based financing and possibly operating leases, with aircraft securitisation also a growing option for larger airlines and manufacturers. Hosier says that Sanwa itself is looking at introducing more asset-based deals into its mix of international business, a potentially attractive option for smaller carriers which may need to raise funds on the basis of their aircraft rather than their credit rating.

The state of Japanese lending is not expected to have an immediate impact on the airlines, which now have few unfinanced deals and growing stores of cash, but could become a brake in the future if or when financing demand grows and the cycle turns down. "For some it will not be a question of more expensive financing, but no financing at all," says Hosier.

There are already signs of a funding squeeze in the worst hit parts of Asia-Pacific. Not only have some carriers become less attractive as risks, but their local banks, which would be their natural allies are in little position to help. South Korea's troubled Asiana is struggling to find replacment financing after the UK's NatWest Bank pulled out of a fleet securitisation and bankers fear that other deals in the region could begin to suffer.

Source: Flight International